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Charitable Incorporated Organisation: consultation now published

As explained in previous editions of Charity Matters, the Charities Act 2006 (the “2006 Act”) contained provisions for a new corporate structure for charities to be known as the Charitable Incorporated Organisation (“CIO”). However, the introduction of the CIO is dependent on the making of secondary legislation.

After a long wait, a joint consultation on the draft secondary legislation has now been issued. This can be found on the website of the Office for the Third Sector (www.cabinetoffice.gov.uk/third_sector). The consultation documents explain how responses can be made to the consultation. The consultation period ends on 10 December 2008.

Potential advantages of the CIO structure

A CIO will be a body corporate with a constitution and with a principal office in England or Wales. In the same way as a limited company, a CIO will have a separate legal identity and so will be able to hold property in its own name. It will also share the key advantage of a corporate structure in protecting the members and trustees from personal liability subject to certain limited exceptions.

The draft consultation highlights a number of potential advantages of a charity being constituted as a CIO rather than as a charitable limited company. These include:

There will be no dual registration requirement. A charitable company is required to register with Companies House as well as the Charity Commission. A CIO will only be required to register with the Charity Commission.

Simpler reporting and filing requirements. For example, a charitable company is required to prepare and file separate annual reports and annual returns with each of the Charity Commission and Companies House, whereas a CIO will only have to file such documents with the Charity Commission

Less complex constitutions. There will be statutory powers available for the charity trustees of a CIO, which should mean that simpler constitutions will be possible. For example, a CIO will have a statutory power to do “anything which is calculated to further its purposes or is conducive or incidental to doing so”.

Greater constitutional flexibility. A CIO will not be subject to company law provisions, many of which are designed primarily for commercial companies and may not be appropriate for not-for-profit organisations.

Drawbacks?

The consultation recognises that the CIO will not be suitable for all charities. Although the CIO has advantages over other corporate structures for charities and will provide the protection of limited liability, it will be more complex to run than an unincorporated charity. For example: • Accounts and annual returns will have to be submitted to the Charity Commission irrespective of the CIO’s level of income.

Charity matters

A CIO will be required to maintain registers of members and trustees and to keep these available for public inspection.

There are a number of criminal offences that could apply to the charity trustees of a CIO if they fail to meet the requirements set out in the relevant legislation.

In the light of the above, a CIO may not be appropriate for charities that have no employees or which do not enter into significant contractual arrangements. Conversely a CIO is likely to appeal to charities that provide services or that have employees.

Conversion to a CIO/Transfer of assets to a CIO

The 2006 Act and the draft regulations contain provisions to allow for the conversion of charitable companies and community interest companies into CIOs.

The 2006 Act contains provisions relating to the conversion of charitable industrial and provident societies (“IPSs”) into CIOs. However, a CIO cannot be an exempt charity and since charitable IPSs are currently exempt charities, they will not be able to apply for conversion until the relevant provisions in the 2006 Act are brought into force resulting in the loss of their exempt status in most cases. An IPS will remain exempt if it is registered as a social landlord under Part 1 of the Housing Act 1996, so that such an IPS will not be able to apply for conversion to a CIO.

If a charity is an unincorporated charity, it will not be able to apply for conversion to a CIO because it does not have a separate legal identity. Instead, an application will need to be made to register a new CIO with the Charity Commission and the property of the unincorporated charity will then need to be transferred to the CIO. The 2006 Act contains provisions to allow for the transfer of property by an unincorporated charity to a CIO but these provisions will not be applicable in all circumstances. For example, they cannot be used where a charity holds “designated land”, which is defined as land held on trusts which stipulate that it is to be used for the purposes, or any particular purposes, of the charity. In such cases, it will be necessary to consider whether there are any powers in the constitution of the unincorporated charity that can be used to effect the transfer and if not to seek a Charity Commission order or scheme.

Some issues still appear unclear from the draft regulations. For example, how permanent endowment would be dealt with on conversion to a CIO/transfer of assets to a CIO.

Draft Regulations

The draft regulations are over sixty pages long and contain detailed provisions regarding the setting up and administration of a CIO.

For example, the draft regulations cover:

Matters to be covered in the constitution of a CIO.

Provisions relating to debentures and charges created by a CIO.

Provisions regarding the communication of information or documents to or by a CIO.

Separate detailed draft regulations have been issued as part of the consultation relating to the insolvency and dissolution of CIOs.

Draft ‘model’ constitutions

The Charity Commission has issued two draft ‘model’ constitutions for consultation:

An ‘association’ CIO will have a membership and a body of trustees. The members will be able to periodically elect the trustees.

A ‘foundation’ CIO constitution will provide for the body of trustees alone to make up the membership.

Consultation questions

The consultation sets out a number of issues on which the Office of the Third Sector indicate they would welcome people’s views. These include:

The duty of care that should apply to the trustees of a CIO.

Whether an unincorporated association should be able to become a member of a CIO.

The requirements that should apply in relation to the accounts of a CIO.

Whether any improvements are needed to the ‘model’ constitutions.

Future Developments

Once the consultation period has ended on 10 December 2008, the Charity Commission and the Office for the Third Sector will be reviewing the responses they have received and using these to produce final drafts of the regulations and ‘model’ constitutions.

The consultation document indicates they will aim within three months of the end of the consultation period, i.e. by 10 March 2009, to produce a timetable for the commencement of the relevant provisions in the 2006 Act and the introduction of the regulations.

Other matters

The Charity Commission has issued new guidance regarding the registration of excepted and exempt charities and in particular the registration timetable. This can be accessed on the Commission’s website (www.charity-commission.gov.uk).

The 2006 Act introduced a new statutory power for a charity to spend permanent endowment in certain specified circumstances and subject to stringent conditions and safeguards. The charities team would be happy to advise trustees in relation to this or any of the other matters referred to in this newsletter.

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